Ground-breaking ruling slams door on avoidance

The decision, which applied to Five Oaks Properties Limited and five other
companies, is expected to have major repercussions for a number of other
businesses which have used pre-entry losses to avoid tax.

Prior to the ruling, ‘refreshed’ pre-entry loss avoidance could be
implemented in two transactions. A company buying another group with capital
losses was not able to recognise those losses against its tax, but if the
acquiring company was then bought out by another group the capital losses could
then be claimed.

Though the companies involved in the case had been bought for commercial and
not avoidance reasons, other companies were able to avoid tax in this way
because of complex legislation, which opened up loopholes to take advantage of
pre-entry losses.

Such schemes, known as ‘top-hat’ schemes, were possible because of wording in
the legislation, but after much deliberation special commissioner John Avery
Jones ruled that the purpose of the law was to block this kind of planning.

Kevin Hindley, head of corporate tax planning at Chiltern, said the decision
would be a major blow for a number of companies that had used such structures.

‘This kind of scheme has been widely used, but this ruling has blocked it. There
will be lots of companies out there that will be affected,’ Hindley said.

Schemes using capital losses were blocked with the introduction of targeted
anti-avoidance rules in last year’s pre-Budget report and the special
commissioners’ ruling has now blocked any capital losses planning that occurred
before the new pre-Budget rules.

Bill Dodwell, corporate tax partner at Deloitte, said the decision marked an
important victory for HM Revenue & Customs in its attempts to clamp down on
companies that had bought and sold capital losses to avoid tax.

‘This was an important and interesting case. In principle, you couldn’t buy
losses to avoid tax, but if you managed your affairs cleverly you could. After
this decision you can’t anymore,’ Dodwell said.

Advisers are certain that the decision by the Special Commissioner will be
tested further even if Five Oaks and the other appellants in this specific case
decide not to challenge the ruling.

Accountancy Age understands that there are other companies which have large
sums riding on similar cases and will almost certainly contest the decision by
Avery Jones. Some insiders anticipate that the matter could be taken to the
House of Lords, such is its importance.